Broker/dealers involved in sales of private placements have been put on notice by the Financial Industry Regulatory Authority (FINRA). In the future, the regulator says it will be stepping up its oversight of private-placement deals.
Evidence of the new scrutiny became apparent last week, when FINRA imposed fines and disciplinary actions against a number of firms that sold investments in Medical Capital Holdings and Provident Royalties.
As reported April 10 by Investment News, FINRA’s recent actions focused on the failure of broker/dealers to investigate the private placements being sold by their firms. Both Medical Capital and Provident Royalties were charged with fraud by the Securities and Exchange Commission (SEC) in July 2009.
Private placements are high-commission products, yielding broker/dealers fees of 7% or 8%.
“Senior officials at these firms failed to fulfill their responsibilities to customers by not conducting reasonable investigations of these unrelated offerings, especially in light of multiple red flags suggesting liquidity concerns, missed interest payments and defaults,” said Brad Bennett, executive vice president and chief of enforcement for FINRA.
“FINRA will continue to look closely at sales of both affiliated and unaffiliated private placements to determine whether the selling firms fulfilled their responsibility to customers. Broker-dealers and the executives should have looked at the private-placement offerings much more closely,” Bennett said.